Lightning Network, Explained

Scalability problem

Every technology has its own bugs or problems that it can face. Even if you write a simple code you can find bugs in it. Of course, when your program is simple your bugs would be easy to fix, but imagine if your project is as huge as Bitcoin is. Your bugs and problems sometimes will look just unsolvable. The one thing that gives difficulty to a Bitcoin network is scalability and here we will talk about the most efficient way of its solution for today - the Lightning Network.

In 2008 when the Bitcoin started, James A. Donald did a public comment saying that the way he understood the project of Satoshi Nakamoto, it didn’t seem to scale to needed size. Nowadays, after more than 10 years Bitcoin still has difficulties with scalability, as well as other old cryptocurrencies, do. 

In the beginning, the Bitcoin platform could only process 7 transactions per second. This was an adequate number for the first period but as the popularity of crypto coin raised every transaction started to take more time and more transaction fees added up. 

There were many solutions suggested to the Bitcoin for enlarging the ability to scale, but the ideal one is not found yet. This is one of the reasons why there are many Bitcoin-like networks that are separated from the original coin.

The concept of Lightning Network

The Lightning network is supposed to be one of the greatest solutions to Bitcoin’s scalability problem for today. It’s a payment protocol that works on the top of cryptocurrencies and makes fast transactions among nodes that are connected to the current blockchain.

The Lightning Network was constructed by Joseph Poon and Thaddeus Dryja in 2016. It allows over million transactions per second and makes scalability of a coin much greater. 

How does Lightning Network work?

To understand this whole process, let’s imagine a common situation when a kid is studying in University in another city and family has to periodically send finances to him. And so the family decides to set up a channel on the Lightning Network.

The fundamental thing that they need is a multi-signature wallet. Multisignature wallet is a wallet with many private keys. They are needed for family members and their child so both of them can have a connection to the wallet. Then each of them, parents and a child, deposit Bitcoins to the wallet, each of them can deposit, for example, 2 coins. From this point, family members can make an unlimited number of transactions. These transactions are just distribution of coins that are shared in the wallet. It means that if Mother wants to transfer her child a Bitcoin she needs to send him the ownership of that amount to him. Then both of them use their private keys to sign in and update their balances.

But actually, the transmission happens when both sides close the channel. The algorithm of the Lightning Network manages balance sheets and complete all processes. So, when the channel is closed Lightning Network registers all the transactions to the Bitcoin’s ledger. 

The most brilliant thing is that when people start to use Lightning Network widely the need of creating a channel will disappear. You will be able to make transactions with someone you have already connected with and the system will find the shortest way to make this transaction happen.

The second thing that is now in the test mode is cross-chain atomic swaps. These are transfers between various blockchains. 

Benefits of the Lightning Network

Here are several advantages of the Lightning Network:

As not every transaction is written on the main network it becomes more problematic to monitor users’ habits and match their wallet addresses. This makes the Internet's anonymity greater.

The transactions that are made via Lightning Network does not need the approval of the whole network so they are faster than we could ever imagine.

There are some problems that are the reason that we can’t consider the Lightning Internet to be the “Final solution” of the Bitcoin’s problem, but what concerns scalability it is solved. Now millions of transactions happen in a second, thanks to the Lightning Network.

Compared to nowadays transaction fees, the Lightning Network’s fees are negligible. 

Disadvantages of the Lightning Network

Everything in this world has its disadvantages, so does the Lightning network:

You may get puzzled in the numerous channels of the Network because they are complex. There are thousands of channels in the Networks and if your final route takes more than one channel your fees will add up.

One of the main disadvantages is that the system is not fully operational yet, so no one can really guess how good it is. 

Channels cap the number of coins you can store.

There is also one thing that is called “hub”. Hubs are special nodes that have the privilege of control. This is a disadvantage for Bitcoin enthusiasts because it will make the Network centralized.

The Lightning Network on the current market

The Lightning Network issued on the main net in March 2018. At that time there were over 1900 nodes and most of them (97%) had an active channel. The number of channels raised very fast and reached more than 11000 channels nowadays. At this time (March 2019) there are 3909 nodes, 3851 of them have a formed channel and there are 32623 unique channels in the network.

Will the Lightning Network be useful?

Currently, the network is still doing its first steps and there isn’t a software yet so that regular users can work and make transactions with. Also, all the current realizations have lots of unfixed bugs. So the network’s developers warn users to make test transactions without spending real money until everything is done. 

Developers understand that the code of the Lightning Network is complex and needs to be tested very attentively. The network should be safe and easy to use so that the Bitcoin association can approve it as a real and final solution to their huge problem. Experts predict that the creation of the complete version of the network will take a couple of years. 

The main reason why everyone is sure that the Lightning Network will be used is scalability. If the network works properly and millions of transactions will actually be made per second, Bitcoin and all other cryptocurrencies will surely adopt this system of coin exchange.

And when this issues and we will have the chance to practice cross-chain atomic swap technologies the cryptocurrency exchanges will become truly decentralized and all processes will change our everyday routine and regular methods of money transactions will disappear.